From Morningstar: 2024-04-10 09:39:00

European equities have become slightly overvalued, trading at 1.05 times intrinsic fair value. Despite this, Europe still trades at a slight discount to North American stocks with varying valuations across sectors, presenting opportunities for investors. Three sectors with emerging themes are identified: easing inflation on consumer-facing firms, growing order backlogs for key industrial firms, and an undervalued utilities sector offering an attractive income stream.

Consumer defensive firms in Europe have underperformed due to high inflation impacting consumer spending. Nestle managed 7.2% revenue growth in 2023 despite negative volume growth, relying on price increases. Consumers are pulling back on purchases due to increased prices, leading to downtrading and a shift to private label goods. With inflation easing, consumer defensive firms stand to benefit with improved volume growth.

The industrial sector in Europe has faced challenges but is rebounding with growing order backlogs, particularly in firms exposed to energy efficiency, data center investment driven by AI, and the energy transition. Although industrial valuations are trading at a premium, certain segments present opportunities for investors with a wide moat rating.

European utilities shares have underperformed due to falling gas prices and high interest rates impacting debt servicing costs. The sector is currently trading at a 20% discount to fair value estimate. Falling bond yields indicate potential for utility stocks to become more attractive to income investors, boosting share prices as central banks prepare for interest rate cuts.



Read more at Morningstar: Equity Strategy Monthly: Three Themes for Q2